V. Who Is in the LIHTC Business Today?
During the past 25 years, a comprehensive infrastructure of public and private organizations has developed to support the growth of successful LIHTC investments.
The LIHTC program was designed to encourage and direct private resources to develop affordable rental housing and to do so sustainably and at scale.
While the LIHTC program was created by federal legislation, a decentralized group of public and private organizations plans, administers, develops, and manages the housing.69 While the roles of the participants have been discussed in this report, this section offers additional information.
HCAs are state-chartered authorities established to help meet the affordable housing needs of the state’s residents. HCAs administer a wide range of affordable housing and community development programs, including tax-exempt housing bonds (mortgage revenue bonds and multifamily housing bonds) and the LIHTC, both of which use federal incentives to leverage private capital for affordable housing. In each state, an HCA administers the LIHTC program and creates a QAP to evaluate project plans and tax credit applications submitted by project sponsors/developers seeking tax credit allocations.70 State HCAs may delegate LIHTC allocation authority to local HCAs.
HCAs have responsibilities beyond allocating LIHTCs. Once an LIHTC project is completed and placed in service, the HCA reviews an audited cost certification of project development costs and determines the final eligible basis amount on which LIHTCs may be calculated. The partnership executes a regulatory agreement with the HCA, binding the partnership to the rental restrictions associated with the LIHTC program. The HCA monitors the LIHTC projects over the compliance period, with a particular focus on tenant income eligibility, rents charged, and the condition of the units.
Project sponsors identify potential affordable housing projects, put together development teams, gain site control and financing commitments, and apply to local HCAs for allocation of LIHTCs or tax-exempt bond volume caps. Project sponsors serve as general partners or managing members that develop, own, and manage LIHTC projects.
Project sponsors include national, regional, and local real estate development organizations. They can be for-profit or nonprofit organizations. Under all state QAPs, a minimum of 10 percent of tax credit allocations is set aside for nonprofit developers.71
As discussed in detail in previous sections of the report, LIHTC investors can be either individuals or corporations, although because of the tax treatment for passive losses,
most tax credit investors are widely held C-corporations.72 Industry experts estimate that 85 percent of the $9.5 billion in equity from corporate investors used to finance LIHTC projects in 2012 came from the banking sector.73
Syndicators perform a critical role in bringing together investors and project sponsors. They often act as intermediaries and provide additional financing tools and technical assistance to project sponsors. Syndicators use pooled funds to invest in numerous LIHTC projects. They perform the necessary due diligence to identify affordable housing investment opportunities, and they monitor the construction and oversee ongoing compliance of the properties on behalf of the investors. Before investing, banks should carefully underwrite syndicators to ensure that the syndicators’ activities are conducted in a safe and sound manner and in accordance with all applicable laws. A bank’s relationship with a syndicator should be guided by the same risk management, security, privacy, and other consumer protection policies the bank uses when conducting activities directly.
There is a robust market of LIHTC syndicators. Some are nonprofit organizations, including national nonprofits, such as the National Equity Fund or Enterprise Community Investment, or regional funds, such as those that are members of the National Association of State and Local Equity Funds. Other syndicators are for-profit organizations. See appendix F for more information on LIHTC investors.
In addition to the tax credit equity, LIHTC projects often require debt financing. Loans can be conventional or government-insured (Federal Housing Administration) products,74 or “gap financing” provided by state and local governments or other third parties. This gap financing goes into a project as “soft loans,” for which payment is due only when there is sufficient cash flow. Appendixes A and B contain hypothetical transactions that illustrate how debt and tax credit equity are used to finance affordable housing projects.
LIHTC projects often require specialized financial products. Because much of the equity is invested after the properties are placed in service, bridge and construction loans are required through the construction period. Banks may provide letters of credit to enhance the creditworthiness of the tax-exempt private activity bonds used in 4 percent LIHTC transactions. They may also underwrite and market the tax-exempt private bond activity issues.
In some markets, lenders have formed consortia to provide debt financing for LIHTC projects. Funds from multiple banks are pooled and then lent to various LIHTC projects. This structure allows smaller lenders to participate in the transactions and reduces the risk for any individual investor. Some of these lending consortia have developed through state banking associations.75
The LIHTC field has evolved to include an extensive resource of professional third- party experts on the use of LIHTCs. This expertise includes assistance in project review, underwriting, and legal and accounting assistance. In addition, numerous trade associations work to develop industry standards, promote transparency, and advocate on behalf of tenants, project sponsors, and investors with federal and state governments. See appendix F for a list of trade associations and other third-party resources.
69 The federal government has adjusted its regulations and guidance implementing the LIHTC program in response to concerns with issues affecting the operation of the program. The IRS has been heavily involved in efforts to improve the program’s efficiency and the strength of the market for LIHTCs. During the financial crisis of 2008, HUD initiated a number of measures to stabilize the market for credits. HUD also provides rental subsidies that help make LIHTC housing in reach of households with very low incomes.
70 State HCAs may delegate authority to local HCAs to issue tax credits, subject to the state’s annual per capita cap.
71 26 IRC 42(h)(5).
72 Generally, S corporations are not subject to tax at the corporate level. Instead, the tax credits and other tax benefits are passed through to the shareholders and are taxed at the individual shareholder level. When marketing LIHTC projects to S corporations, project owners must look through to the shareholders and assess whether they can use the LIHTC. Low- Income Housing Tax Credit Handbook, Novogradac, section 2:14, 2011.
73 The Community Reinvestment Act and Its Effect on Housing Tax Credit Pricing , CohnReznick, May 2013.
74 For information on the FHA Housing Tax Credit Pilot Program, see http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/map/maphome/taxcredit. It is intended to streamline FHA processing of mortgage insurance applications for projects with equity from the LIHTC program.
75 For more information, please see the Center for Community Lending, www.centercommunitylending.org, or the Association for Reinvestment Consortia for Housing.
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